Spousal Support and the Marital Standard of Living

By David Magnuson

As a mediator, my goal is to keep my clients out of court, and as a result, I strive to shepherd my clients through a practical, budget-based discussion of spousal support. That being said, what happens when the budget-based approach doesn’t produce a tidy result? In other words, how do we navigate the sometimes turbulent waters of a spousal support discussion when it becomes clear that either (1) my clients have more than enough income to cover both sets of living expenses, or (2) more commonly, the combined income of my clients is substantially less than the combined costs of maintaining two households?

First, let’s analyze the less painful of the two scenarios – i.e., the scenario in which the parties’ combined income is more than enough to cover any and all reasonable living expenses. For example, imagine that Sally Shoemaker is a 52-year-old Silicon Valley executive whose average annual compensation is $1,500,000. Further, imagine that due to some very lucrative stock options resulting from a prior employer’s initial public offering, Sally has accumulated a net worth of $30,000,000. Next, imagine that Sally’s annual living expenses amount to $150,000 and the living expenses of Jack, her husband, also amount to $150,000.

If all of the $30,000,000 nest egg that Sally has accumulated is considered community property, each spouse will leave the marriage with $15,000,000. Now imagine that each spouse will live in a residence worth $2,000,000 and that each of them will also have $1,000,000 in a retirement account. The residences clearly aren’t producing income, and the retirement accounts can’t be accessed without penalty. (In other words, while ideally increasing in value each year, the retirement assets aren’t producing real income). As a result, each spouse has roughly $12,000,000 in investable (liquid) assets. Assuming that his or her respective brokerage account returns 4% each year, each spouse should have annual investment income of $500,000.

The conundrum should immediately become apparent. Jack’s expenses are $150,000 per year and his investments alone should provide him with $500,000 per year in income. Sally argues that Jack’s investment income dramatically exceeds his monthly needs. She has heard that the philosophical basis of spousal support is tied to helping the supported spouse attain the standard of living to which he or she become accustomed during marriage. Jack can pay all of his bills (and then some) with his investment income. Sally therefore feels that spousal support is unnecessary – worse yet, she feels that any award of spousal support is patently unfair.

What to do? Sally can clearly show that Jack doesn’t “need” extra cash on a monthly basis. That being said, as a stay-at-home father who raised three children, Jack believes that he was instrumental in supporting Sally’s career and he therefore deserves some of Sally’s income for an extended period of time.

Legally, the discussion may slip into an analysis of the “Marital Standard of Living” (or MSOL, if you are a divorce nerd). How does the court determine a divorcing couple’s MSOL? Well, for one, accountants are typically brought into the discussion. A recent discussion with a highly regarded Silicon Valley accountant who specializes in divorce matters suggested that two models are frequently used: (1) the “expense model,” or (2) the “income model.”

Under the expense model, accountants crunch data to determine a reasonable average set of expenses for the couple and then discount the number as appropriate to account for a single spouse’s share of said expenses.

Under the income model, accountants crunch data to determine an average income for the couple and then discount the number as appropriate to account for a single spouse’s share of said income.

At first blush, the expense model seems to heavily favor Sally, while the income model seems to heavily favor Jack. That being said, in California a judge is able to consider the ability to save as an element of the couple’s Marital Standard of Living. This means that the expense model could have a “savings” element built into it.

Regardless, where does this leave us? In a bit of a mess, I’m afraid. This is a classic example of why the bills of divorce litigators can run into the hundreds of thousands of dollars (and even millions of dollars in some sad cases). Does the right answer lie somewhere between the results of the expense model and the income model? Perhaps. But what would happen if the issue was presented to a judge for his or her determination, you might ask? If the answer was the result of the mechanical application of California law (like a basic child support calculation), I could tell you with certainty. In reality, after hearing the expert testimony of accountants for both clients and taking their respective attorney’s input into consideration, the judge would demonstrate that family court is a court of equity – in other words, the judge has a great deal of discretion in setting spousal support. Knowing this, my mediation clients prefer to shape their own destiny by doing the hard work of sorting through their desires and expectations with a neutral third party. If nothing else, at least they will recognize the result.

Now let’s imagine a more common scenario in which Sally Shoemaker is a teacher who earns $60,000 per year and Fred Shoemaker is a carpenter who earns $25,000 per year. Unfortunately, Sally and Fred are mortgaged to the hilt, have virtually no assets, and are burdened with a combined monthly budget that exceeds the after-tax sum of their combined incomes. Now that they are parting ways, the cost of maintaining two households is substantially greater than their combined incomes. What to do?

The short answer to this particular conundrum can be summarized in a few words: the clients must “share the pain.” Presuming that both Sally and Fred are earning to capacity and their respective expenses after separation don’t differ substantially, an award of no spousal support might indeed be an injustice to Fred. Sally may break even while Fred my fall short of his monthly budget by a huge margin. Conversely, too large an award and Sally will find herself descending into debt each month at a rate that exceeds the rate of Fred’s descent into debt.

Application of the expense model won’t likely prove particularly useful – we already know that neither spouse will be able to come close to meeting his or her monthly expenses. The income model, however, might indeed prove a useful means of coming up with a spousal support award.

Philosophically, this scenario is a bit easier to digest than our first scenario. A financial planning discussion will uncover two obvious (but challenging) solutions: (1) each spouse will need to strive to increase his or her income, or (2) each spouse will have to work hard to decrease his or her living expenses. Ideally, of course, my clients who face this situation will do both, and spousal support will be adjusted over time according to the results of their efforts. In the meantime, though, “sharing the pain” by equalizing income to some degree through a spousal support award is likely the answer.